Effect of CSDS on certificate movements

The details as to certificate movements contained in Exhibits 2, 3 and 4 are summarized in the following table to show the impact of CSDS on individual certificate movements. (Note that these are not necessarily the same as security movements, where several certificates may be incorporated in one receipt or delivery.)

TABLE 1.-ESTIMATED EFFECT ON CERTIFICATE MOVEMENTS FROM A COMPREHENSIVE SECURITIES DEPOSITORY SYSTEM

Table I indicates that, with a NYCSDS, present certificate movements by New York brokers and banks would be reduced by an estimated 54%. With a national CSDS, present movements by these banks and brokers would be reduced by 72%. Certificate handling by banks and brokers in the U.S. under a national CSDS would be reduced some 74% from the present. Transfer agents' volume would be reduced by 40% and 65% under the respective systems but, as is to be expected, some of the movement reduction is offset by an increase in the depository's activity.

CSDS certificate movements to and from transfer

The projected expanded certificate movement of CSDS arises from an increase in (a) receipts of deposited securities which are (b) sent to transfer, and (c) receipts from transfer of withdrawn securities, registered in names outside the system which are (d) delivered to depositors. (It is assumed that CSDS would always receive from transfer one jumbo certificate for deposited securities of each issue each day, and deliver one such certificate to transfer each day for split into the withdrawals.)

Consideration is being given to the feasibility of procedures whereby one of the two handlings of deposited and withdrawn securities by CSDS and transfer agents can be eliminated. This might be by direct movements between depositors and transfer agents, with appropriate notification to and controls by CSDS, or through some alternative.

If such a change could be effected, certificate movements would be further reduced, as follows:

TABLE II.-ESTIMATED EFFECT ON CERTIFICATE MOVEMENTS OF DIRECT DELIVERIES BETWEEN DEPOSITORS AND

Looking solely at the New York financial community, and considering either CCS or NYCSDS as a part of it, it is evident that the duplication of work between NYCSDS and transfer agents will take bloom off the rose as the depository becomes more comprehensive. This should give added impetus to finding a feasible means of eliminating the duplication. Certificates in the names of individuals

Of the cancelled certificates examined, 1,090 (18%) were in the names of individuals. These certificates were involved in 5,031 movements, or 22% of all recorded actual movements. Even today, then, certificates in the name of individuals require more paperwork in the securities and banking industries than an average of the remainder. But in CSDS-New York only or national-they will account for a considerably higher proportion of physical certificate movements. Table III shows this.

TABLE III.-ESTIMATED PROPORTION OF TOTAL CERTIFICATE MOVEMENTS ACCOUNTED FOR BY CERTIFICATES IN THE NAME OF INDIVIDUALS

1 Percentages are of the total actual or projected certificate movements of those in the 1st column, taken from exhibit 2. 1 Without the direct delivery to, and receipt from, transfer agents just discussed.

As CSDS becomes more widespread-more effective in accomplishing securities deliveries by book-entry-it seems more than probable that attention will be concentrated on attracting certificates in the names of individuals into CSDS. Certificates in the names of "Others"

Certificates classified in this study in the names of "others" are not inconsiderable in relation to a prospective CSDS. They account for 13% of the cancelled Certificates examined. In terms of movements involving brokers, banks, CCS CSDS) and transfer agents, the actual movements of such certificates were 10% of the total, 17% of those projected with NYCSDS, and 30% of those with a national CSDS.

Foreign Banks..

Certificates classified as registered in the names of "others" break down approximately as follows:

Pension, retirement and profit sharing plans and funds..
Insurance companies----

Percent

53

20

11

Miscellaneous (corporations, estates, trusts, custodians, investment clubs, etc.).

16

100

Total

Certainly, some of these "other" certificates will be targets for immobilization in CSDS as the latter becomes fully operational. Geographical distribution of certificate movements

The locations of banks and brokers handling certificates were identified and are given in Exhibit 5. That data, together with New York volume, is summarized below:

TABLE IV.-GEOGRAPHICAL DISTRIBUTION OF CERTIFICATE MOVEMENTS OF BROKERS AND BANKS

As has been said, the study contains a bias toward concentration in New York City in that only certificates cancelled by transfer agents in New York City were examined. Were certificates of the same or other issues cancelled by agents in other areas included, the percentage of the movements outside New York City would increase. However, a broader sample would without question continue to show an intense concentration of broker and bank certificate movements in New York City.

Effect of CSDS on number of certificates issued

Exhibit 6 shows the registration of the 6,151 certificates examined, and the estimated number of certificates that would have been required to effect the same securities transactions under a NYCSDS and a national CSDS. Except for CCS (CSDS), no change in the denominations of certificates was assumed.

Under date of July 20, 1971, a Research Report was issued in which the effect of CSDS on transfer activity was estimated based upon a study of transfer journal entries for some 30,000 old certificates (22,000 new). That study referred to this one on cancelled certificates, and cautioned that the results might have to be re-evaluated in the light of the later findings. The data in Exhibit 6, and the estimates in the earlier study, are compared in the following table:

TABLE V.-ESTIMATED EFFECT OF CSDS ON NEW CERTIFICATES ISSUED

The somewhat lower reduction in transfer volume suggested in the current study was anticipated: the two parties shown in a transfer journal entry, taken alone, might suggest that the certificate movements could be replaced with a book-entry; the complete history of the certificate, however, may show that it was needed to go to a person outside of the "system", then return. Both studies show that the reduction in transfer volume from CSDS will be substantial.

Age of certificates

Questions are frequently raised as to the length of time certificates are outstanding. Such a question is pertinent, for example, when considering the proposal of some that certificates be gradually eliminated by not issuing new certificates when old ones are turned in to the transfer agent.

The length of time each of the 6,000-odd certificates examined was outstanding was noted. A detailed list of the certificates ages is given in Exhibit 7. That information may be summarized as follows:

TABLE VI. -CUMULATIVE PERCENTAGE OF CERTIFICATES RETURNED TO TRANSFER BY THE END OF SELECTED PERIODS OF TIME

The sample shows that the velocity of turnaround time varies greatly according to the registration. Certificates registered in the name of Cede or of New York brokers were of short life. Certificates in the names of individuals (onesixth of the total) were slower in returning. About one-quarter were returned in six months, half in two years and three-quarters in five years. Ninety percent was not reached until the tenth year.

Number of shares per certificate

The recent emphasis on the use of "jumbo" certificates is known to be increasing sharply the number of certificates for more than 100 shares. Accordingly, the pattern of sizes of the certificates covered by this study, contained in Exhibit 8, may already be out of date. The sizes may be grouped as follows:

The reasons for the issuance of less-than-100-share certificates are probably so varied as to make quantitative analysis very difficult, although one wonders whether 25% of all certificates need to be in this category. What Table VII brings out clearly is (at least at the time the certificates covered by this study were issued) the heavy use of the 100-share certificate. Granted that this denomination is consistently needed to fill out the exact number of shares required for deliveries, it is pertinent to question whether many of these could not have been consolidated into "jumbos". Certificate handling would have been reduced accordingly.